Getting Enough.. and Then Some

View last week from the top of the old-town waterslide – Longmont, CO

On the long list of Imaginary Reasons Why Early Retirement Wouldn’t Work, many of the concerns are variations on the theme of “I won’t be able to retire early myself, because I wouldn’t have enough money to do X”.

The “X” can be anything. Often it is something family-related like raising a large number of children, funding one or more university educations, or taking care of elderly parents. Other times it is lifestyle choices that happen to cost more, like planning to retire in San Francisco or New York, or regular international travel and sightseeing. In certain dark cases, it may even be the desire to continue to regularly purchase brand new four-wheel-drive luxury trucks and drive them around town instead of riding a bike.

Everyone has a different picture in their mind of what expenditures are necessary and life-enriching to make. Even here in the supposedly-frugal Mustache family, about half of our $25,000 annual spending is on optional luxuries like living in an expensive house, eating a low-carb mostly organic diet, owning two barely-needed cars, and traveling for three months every year. The point is that every expense profile is unique, and every person will eventually need to find a way to make expenses and income match when retirement comes – whether retiring at 25 or 85.

That’s all obvious. But these bleak projections of future poverty are often missing something that is not always obvious to the beginner student of financial independence. And that is this graph:

See, what the graph shows is that the longer you work at saving, the faster your saving becomes. While initially you might be saying “Duh, thanks for the refresher in compound interest”, consider the implications on funding those niceties you were mentioning earlier.

To put some numbers to the graph, imagine a family with a 50% savings rate. They are earning a $75k take-home pay and spending $37,500. Their retirement savings will look like this, assuming a 5% after-inflation return:

End of Year

Amount

Increase in Wealth

Passive Income

Percent of What you Need

1

$37500

$37500

$1875

5%

2

$76875

$39375

$3844

10%

3

$118219

$41344

$5911

16%

4

$161630

$43411

$8081

22%

5

$207211

$45581

$10361

28%

6

$255072

$47861

$12754

34%

7

$305325

$50254

$15266

41%

8

$358092

$52766

$17905

48%

9

$413496

$55405

$20675

55%

10

$471671

$58175

$23584

63%

11

$532755

$61084

$26638

71%

12

$596892

$64138

$29845

80%

13

$664237

$67345

$33212

89%

14

$734949

$70712

$36747

98%

15

$809196

$74247

$40460

108%

In this example, our savers start from scratch and end up financially independent (passive income at least 100% of expenses) in just over 14 years. But look at the difference in wealth accumulation:

in Year 1, $37,500 was saved, which started to generate $1875 of annual passive income (5% of their spending)

in Year 14, over $70,000 was saved, boosting passive income by about $3500 (almost 10% of spending)

In other words, as you approach financial independence, your savings rate goes off-the-hook. Very short periods of earning additional money result in very large boosts to your permanent passive income. One extra year of work would boost your income by 10% ($3500, or enough to pay for a friend-in-need’s grocery bills forever, or take an extra plane trip around the world each year) – permanently.

Another way to marvel at this effect is to just look at the quantity of extra wealth. One year generates $70,000 of savings, enough to pay for a complete four-year university education in most places. The next year adds a further $74,000.

This effect isn’t just for 50% savers, either. Lower savings rates result in even bigger changes in saving power over the course of a working lifetime. It takes longer to get to independence, but at that point you will be even more amazed at the boost you are receiving by surfing on the front of the money wave.

So while I’ll agree that the financial newbie has a few years of ass-busting ahead of him to buy his freedom, I think he is in for some positive surprises when it comes to ‘stashing enough to fund any niceties that might need to be added.

This exponential nature of wealth accumulation leads to a surprising feeling of confidence, which you could call “Having Enough… and Then Some”. Not only are your bills covered, but you now have confidence that it would be easy to cover any additional expenses that might come up. Mr. Money Mustache is often accused of “cockiness” in this regard, when in fact the confidence is just the result of simple math. Income = Principal x Investment return rate.

You have an array of options open to you, that may never even be used in your lifetime. But just knowing they are there for you, opens up an airy new Dojo in your mind that allows you to do mental Kung Fu that would have been impossible before you were free. Those options boil down to just three concepts:

You designed your retirement income to be at least slightly higher than your retirement spending. So there is a frequent feeling of surplus and safety.

You always have the power to spend less, if you ever choose to do so.

You always have the power to earn money, again at your own choosing. During the extended freedom of an early retiree, this is very likely to happen at least occasionally.

The last two are possible at any time, but neither is likely to be truly necessary. But any time #2 and #3 are practiced even if just for fun, it reinforces #1 even more, for the rest of your life.

This feeling of control gives you the “And Then Some”, to add to the feeling of “I have Enough”. And for truly joyful living, I recommend adding both feelings to your plate as part an early retirement diet.

That feeling of “And Then Some” is also referred to as “Abundance”, a concept often used on some financial blogs as an excuse to earn more in order to be able to spend more. But a truer form of Abundance is just knowing, right to your core, that you already have more than you need, and this condition will persist as long as you live.

Experience these feelings on a regular basis both before and after retirement, and you will be enjoying a truly rich life.

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It’s really fun to generate your own graphs taking into account your own income and goal savings rate. Currently my graph is actually similar to the one shown here. But hopefully if the wife and I continue to earn more and spend the same our graph will just get steeper!

You should definitely be doing something with your money. Whether buying a second property or buying bonds, stocks, REIT units or similar “financial” investments depends on your local market conditions and risk factors:
1- What’s the return rate on your investment? Some markets have really good rent-to-price ratios, which is also a good indicator that your capital is fairly safe, while in others you’d be better off sticking your cash in a savings account, where you have no downside risk. Have you remembered to factor in maintenance and advertising costs?
2- Buying rental property is a part time job. Are you earning a big enough premium to justify the time and aggravation (remembering MMM’s “your free time is worth more than $25/hour…” axiom).
3- Price expectations. If your market is still depressed from the 2008 crash, you’re likely not facing much price risk. But if you’re seeing stories about unaffordable housing, I’d plan based on a pessimistic scenario for future prices.
4- Are you seeing inflated profits because you’re financing the house purchase. Lots of people see “invest $30k and and see $1k per month in rent…that’s like a 40% return” but if you’re leveraging your $30k to buy a $300k house, it’s only 4%…there’s better investments out there that won’t take up a lot of your time.

Investment advice in blog comments is probably not great advice, but don’t think that buying rental property is somehow the only thing you could do with your money. Research your options.

“assuming a 5% after-inflation return”. That’s exactly the problem that I see.

I’m in Europe, and the stock market has at best moved sideways for a long time. Dividends are being cut, and here we don’t even have something like a Vanguard total market fund – we have smaller versions, or others that replicate the S&P500, but with currency risk. Stock profits and dividends are taxed at 25%.

So to be on the cautious side I use “1% below inflation return”. Or are there alternatives I haven’t thought of?

Hello there, I’m kind of in the same situation (Germany), but 1% below inflation is way to low, even with the current market situation, you can easily find bonds with about 3%-5% interest, sure, there is some risk, but not too much (bonds are ALL in EUR)
Wal-Mart Bond: XS0453133950
France Bond: FR0011461037
Microsoft Bond: XS0922885362
Austria Bond: AT0000A0U299
GE Bond: XS0319639745

Since MMM says that you need 15 years to build the nest egg, let’s look at the last 15 years in Germany:

January 2 1998 the DAX was at 4054, it is now 8250, a return of 4.7%, minus inflation which has been around 1.5% so the real return was 3.2%. Ok it is not 5% but a saver would have definitely end up with a decent nest egg.

Now assume that same person invested 1 euro (or the DM equivalent) every year starting in january 1998, that person would have 23 euros adjusted for inflation now. Since the DAX yield is about 3.3%, tat person would get 76 cents per year just in dividends. This would have been pretty good, no?

Don’t listen to the downers (or the overly optimists), a mustachian believes in math, not in what you hear in the street.

The DAX index includes dividend payments, so the percentages are already the total. 4.7% is before taxes that are around 30% on capital gains in Germany. Depending on how much of the DAX growth came from dividends tax would cut up to 1.4% every year. Still, the DAX is only one index, only shares and just 30 companies… There have been lots more opportunities in the past 15 years.

It would be much better in my opinion if all indexes would do that, it would give the whole picture.

Christian – I am in France, not Germany so I don’t know the tax system but isn’t there a way to shelter the dividends from taxes at least temporarily? Here in France you can shelter up to 132k€ in share value through a PEA (you need to leave it there a minimum of 8 years and dividends are still somewhat taxed but the tax rate is only 15.5%). Some people also use insurance contracts but there are too many fees in my opinion.

There is a way to defer tax payments called Riester-Rente (for employees) and Rürup-Basisrente (for anyone else). They are supposed to mimic our public retirement system. Retirement payments start at 60 with no earlier access whatsoever and have to be monthly payments guaranteed for the rest of your life. As a result, only insurance companies offer these retirement plans and limit investment options to their own actively managed funds with lots of bonds and only few stocks.

I am still fairly new to the frugality game but I am learning more through each one of your posts. I did we’ll for a few years and then got caught up in the “now I can afford X” mentality. I was left with only 66% of my money and not much to show for it. I am slowly getting back to where I was using many of your ideas. Thanks for all of the info and keeping the Rest of us on track.

I think of financial independence in levels. Starting with what’s the minimum amount of passive income that I would need to walk off my job and fund an otherwise unremarkable lifestyle. The then moving up the chain of luxury from there. Each additional level requires more time at work – but not that much more, which isn’t bad if you like your job.

I think of it in terms of levels too… but I have broken my plans for FI into 5 stages:

Earn enough passive income to be able to re-negotiate my work contract down to 4 days a week, then 3, then 2, then 1, then FI! It will take longer than the hardcore MMM method, but as long as I am doing work that I love, then a phased withdrawal (yes, I’m ex military) is a good risk/benefit ratio for me!

A friend of mine used to think in terms of levels, too. Two kinds, though: one by lifestyle (he was able to save enough to achieve a homeless lifestyle fairly early on) and one by country (he would be able to retire in less and less impoverished countries as time went on).

That’s how I am planning mine too, sort of, though I don’t think of them as impoverished countries, but low cost of living. My ideal retirement country is Taiwan, where my wife is from and where I had lived for 6 years. Cost of living is way lower, with universal health care, great weather, and great food. For a quick comparison, we rented a 4 bedroom, 2 bath, apartment for $300/mo including HOA fees. It was around 1700 sqft.

Our first milestone where we consider ourselves essentially FI is when we have enough to live in Taiwan off our return. We may expand this to include retiring in America, and then both, but we’ll revisit the further milestones once we hit the first one.

I’m at about year 3 of this plan (well, more or less, with my own numbers). So I still have some years to go; but already I find it pretty cool that my stash already generates about one month of expenses every year… And I don’t need to do anything for that to happen; just let the money sit there (in investments).

At some point the “and then some” is no longer something valuable in your life and you can just live life without wanting more. We are on our way and I can’t wait until we can just enjoy life and help others with our extra time and freedom.

I retired at 52 about a year ago and when I quit my job some co-workers asked me about early retirement. One co-worker about my age said that he would not be comfortable retiring unless he had $7 million. I said that I would never retire if I had to wait until I had that much money. The sad thing is that I’m pretty confident that he already had as much or more money than me, so he could have retired at the same time I did.

He called me about 6 months later to offer me a good job in a startup and he was pretty surprised when I said “no”. He couldn’t figure out why I wouldn’t want to start working 50-60 hours per week. I told him that my freedom is more valuable than money now and I can invent my own interesting work.

Having lived 40 plus years as an adult and experienced the inflation over that time period, I agree. Started at 8K per year and now stand at 70K per year and have essentially the same life. I have to count on at least living another 30 years minimum considering that my parents are still alive and well. So extrapolating my 20K budget now will be something on the order of 150K in 30 years. Thoughts?

But you don’t actually need 70k to live on, do you?
I certainly don’t and I’m the wage earner for a family of 4. We live on about a third of that.
The key here is how much money you have set aside in your ‘stache.
Those assets grow by about 7% per year, on average.
You take out 4% to live on and the other 3% is enough to take care of inflation.
Your 4% will be larger every year and will consequently keep pace with inflation.

Each kid will get 100K for college, so that knocks me down to 800K. I do realize that college is changing and may not even be required, but I want to be able to help should they need it.

I fully acknowledge that a large portion of my motivation is myself graduating with massive debt. It deeply scars me to this day. No matter how hard I worked, I just don’t think I would have been able to get through it with no debt. No way I want my kids to start off in the real world under the same circumstances.

I’m also surrounded by people with good incomes, who extrapolate their current high income, with sometimes even higher spending (debt–poor silly dears), into needing well into the millions of dollars for retirement. The thing is, by definition those looking for $5 or $7 million have a high rate of spending, so it’s not clear to me how they think they’ll save that amount.

In the last few years, it’s become really common for colleagues and friends to claim that “I’ll never retire”. Sad to think that truly, many people WILL never retire. I hope it doesn’t come to that for my loved ones, because when I’m financially independent in 3 or 4 years, I hope to spend time with them.

But, good to know so many people will be paying taxes to keep up the trails I’ll hike on while they’re hauling themselves into work in their brand-new Lexuses.

It is nice to see there are people that think the way I do. Sometimes it feels like I am the only person that worries about rational spending of money and about a better future.
All my friends live on constant debt, spending way too much on stupid things (like 400 dollars monthly on the beauty parlor) and I can´t even talk about these ideas as people feel as if I were attacking their life styles.
Good to see there are sane people out there.

Yeah, it IS good to read blogs like this and know there are like-minded people around. It’s encouraging to know not everyone thinks I’m insane for not spending all my income for the life of luxury they think I “deserve” for working so hard.

Thing is, I “deserve” to buy my freedom, be financially ind., and have more choices in this short and sweet life.

X is not usually what takes up income that could be saved. It does get you into the mindset that you’re going to be working until you’re 65 anyway, so why not design a retirement plan based on that. Then you don’t need to save as much, per-year, (get to spend more). But it also sets your spending expectations at a much higher level, which is a key reason retirement seem out of reach. I saw a NYTimes article that said:

“Without another source of income, perhaps from traditional pensions from either or both spouses, he adds, a household like this won’t come close to replacing 80 percent of its pre-retirement income — often considered an acceptable target level. ”

Why would you need 80% of your pre-retirement income, if you never spent that much while you were working?

The real magic is that lowered spending both increases savings and lowers the bar for how much you need to save.

I think the NYTimes article was a stealth ad to get people to sign up with financial advisors who want to skim 1-2% off their cumulative savings. Make people feel uncomfortable and uncertain and they’ll feel like money spent on an advisor is a wise choice.

Jane, perhaps you should be thinking of the 40% going toward debt as getting you the return on whatever interest you are paying down. That’s how I like to think about crushing our debt sooner… down to $12k in debt at 6.2% means I’m getting a 6.2% return by paying that off aggressively. Also, you’re already used to seeing that 40% go elsewhere, so it will feel even better when that’s going into investments!

So, here’s a stupid question… How does one go about investing? Does one invest through their financial institution, or does one attempt to find a financial advisor elsewhere? Or, does one go to it themselves? We’re at the point of beginning to snowball savings, having become debt free last month. What do we do with the money now? I’m leery of finding someone to help us invest… Seems like they’re always scamming people or charging high MERs, whatever that is, lol!

Open a Vanguard brokerage account and buy index fund ETFs according to the asset allocation you choose. Set up automatic transfers from your bank account. Don’t make withdrawals, don’t mess with your asset allocation, and pay no attention to the market.

Usually not. Vanguard Canada doesn’t offer the same service, and opening a brokerage account across borders opens up all kinds of problems. (Moving money, taxes, that sort of thing.) Probably technically possible, but not easy, and the tax thing might cost you in the end.

The best deal I’ve found on discount brokerage in Canada is Questrade, but it’s not simple for doing small automatic purchases, since there’s a per-transaction cost of about $5. It’s pretty easy to self-manage, though, and buy low-cost ETFs or blue-chip stocks. They’re also pretty good if do you want to buy mutual funds, since they’ll refund you any trailer fees they receive over $30/month, which can actually make them a competitive investment vehicles once you’re above that threshold.

Well, really, you can buy pretty much anything, but buying a high-risk stock can be an expensive mistake. (Been there, done that.) Dividends are your friend.

They do the same thing (vanguard ETFs) but they manage it based on your level of risk acceptance and life stage. They automatically rebalance, and that gives you quite a bit of dollar cost averaging. Their investment advisor is Burton Malkiel, who wrote a random walk down wall street, an informative read.

I think a big part of this is living in a perpetual state of gratitude for your “and then some”. If you get too used to the additional luxuries and take them for granted, hedonic adaptation will mean you start to see them as a “need” and fall on the other side of that line that indicates “enough”.

My mind always does this math when someone tells me that I wont have enough income to retire early. To that I say, perhaps, so why don’t I just work 5 years longer and have a guaranteed fire hose of income shooting at me every year. The math is fairly straightforward

I find it kind of mysterious that people say they can’t retire because they need X income in case Y happens. There are so many things that can happen that you can’t predict, but you’d rather continue working than just take a chance? These same people seem to forget that they can, in fact, still earn money when ‘retired.’ Retired doesn’t mean you are unable to ever work again. I know lots of people who are at retirement age (early to mid 60s) and they are ‘retired’ but still work in some capacity because a) they like to augment their pensions and social security to fund fun things like travel, b) when work is optional, it’s more fun, and c) they like having colleagues.

I think MMM counts principal paydown as savings. I do for my personal calculations since that is buying me a place to live permanently, whereas rent money doesn’t get you anything but that month. I’ve started thinking of the principal as savings and the interest as rent.

Definitely! Principal paydown is definitely an increase in net worth, which makes it savings.

Now, whether or not you are paying down principal on an asset worth owning is a different matter. You might be paying down your BMW X5, which depreciates faster than you can pay it off. Or owning a 4,000SF house between two people, which is eating more money in property taxes and utilities than you really need to have eaten.

But luckily, you can and should reallocate money between those paid-off assets and optimize over time. Sell the X5 and buy a small car, downsize the house and put the balance into money-producing assets. Tied-up money really can be freed up and reallocated, and I encourage people to consider doing so regularly.

Every time I make a mortgage payment my net worth goes up. I consider that a part of my savings program. Especially when I make additional principal payments. Fortunately my house had held its value and I have more than 60% equity.

We always knew about magic of compounding, and yes, math makes a lot of sense BUT when I saw one day that stash generated in just one month almost 1 year of min FI expenses – that was beyond AMUSING. I almost have to pinch myself to make sure that it is not a dream. Now we do have more confidence than ever that we will get to FIRE “and then some”.
Nothing can stop us :D

I think the attractiveness of a simple argument for FI like this is that is that it is relateable to individuals or families in any income bracket. Similar to ‘paying off the house’, telling someone to simply save/live 50% of their income makes it incredibly easy across all income and expense levels. Saving $1,000,000 as a next egg seems impossible to many and not enough to many others. But I like the simplicity of compound interest and saving half your money. It doesn’t matter what you earn or spend. Just save half and you’ll be free in <15 Years

Over the long run, I’d still expect stocks to return 5% after inflation if you make regular investments through the next several business cycles. REITs as well. Rental houses can easily double that yield, even without leverage (and go higher if you buy them with low-interest fixed rate mortgages).

Putting solar power on your house, upgrading to a tankless water heater and LED/CFL bulbs and other small-scale investments like that often returns more than 5% as well. Cutting costs is always at least as good as increasing income.

The key to getting good yields is to never fixate on an immediate snapshot of the world’s financial picture. Don’t look at the headlines and participate in the boom/bust hysteria – what we really want is just to own productive assets for a really long time.

The problem is when you have more money, it’s imperative to diversify. I had 100% in stock for a long time, but now I’m too risk averse to do that anymore. It’s hard to get 5% with a more conservative asset allocation.
We have
– home (practically no gain)
– rental properties (????)
– bonds (1-2%)
– cash (0-1%)
– stocks (???)
– car (why do you have 2 cars anyway? I forgot…)
– other investments…
Don’t forget all the taxes too.

Thanks for the jolt to get us going in this morning; In this example, it appears that we are talking about all taxable income in the hypothetical example (if they are withdrawing on it before they reach age 59.5).

I find it interesting to compare this to your related classic article: A Brief History of the ‘Stash: How we saved from zero to Retirement in Nine years.

In there, your savings takes off like a rocket towards the end (probably due to additional passive income helping the stash as well).

Also, in there you appear to mix and mingle the non-taxable with taxable savings together. Thus, when stated yearly stash amounts, I assume that you are including savings you made during these years you cannot touch yet since some went into 401k type investments.

George, I agree it’s important to save in both taxable and non, but always look at the math. For example I earn my income in California but live in a state with no state income tax. So any $ I put into a 401 avoids Cali’s astonishing top tax rate of 9.3%, so if my federal bracket is lower in retirement, I’d be ahead by that difference minus 0.7% even with the 10% penalty, and at most be out 0.7%. Of course I will still try and use taxable accounts and Roth IRA principal first, but if I need it the penalty is worth the risk in my case.

And in everyone’s case if your employer matches it’s worth putting in enough for the match, penalty or not. A 10% penalty is a lot less than a 50 or 100% ROI from your employer.

You’re spot on. We get so worried about penalties and such, that it can keep us from saving in these tax delayed structures.

I remember years ago a fellow worker who refused to work overtime because it would put him in a higher tax bracket. He thought all his monies would be taxed in the higher bracket, not just the money he made in that bracket.

Thanks Mike! I agree, it’s like people think once it’s in a retirement account that they *can’t* get that money until they’re 59.5, when there is really just an penalty cost to it. Yes, it would suck to hand over 10% extra to the feds, but it wouldn’t be on all of it, just on what I need to take out for a few unknown years between reducing taxable accounts and hitting that age target (after all, if I need to fully withdraw my 401 before I’m 59.5, I have much much much bigger problems than a tax penalty). Granted, if I stopped working in California I’d focus more on taxable investments, but I think this is a tactic worth considering for anyone in a high tax state like CA, NY, NJ, etc who thinks they might retire somewhere with low or no state income tax like NV, FL, etc.

I’ve met a few folks like your coworker before, and it’s really difficult for me to wrap my head around. I mean if you’ve filled out a form more complex than an EZ, how would you not understand marginal and effective tax are not the same?

A retirement vehicle that I use that is similar to this thought process is my HSA. I contribute to it before I contribute to other tax advantaged accounts. There are several reasons for this:

1. HSA contributions through my employer avoid FICA and Medicare taxes, increasing my initial contribution compared to other tax advantaged accounts.
2. If I don’t need the money for medical reasons ever, I can still withdraw from it and pay taxes on it at the time I withdraw (so it is similar to a traditional IRA or 401k).
3. If I have medical expenses (and I have had them) then I can withdraw up to the sum of my expenses (tax-free) at any time in the future. Nice emergency fund if you ask me!

Points 1 and 3 make this unique compared to any other tax advantaged account. Point 2 makes you see that this is more of a retirement vehicle than it is a way to cover your medical expenses.

I agree Aaron, HSAs are a fantastic retirement vehicle. Sadly many employers don’t yet offer them- FSAs where the $ expires at the end of the year still seem much more popular- but I hope that will change in the future.

You can take your contributions out at any time tax free for that reason, but can’t touch the gains without paying a penalty and taxes. Unless it goes toward certain approved expenses like a college education, I think toward a home down payment, etc.

American tax rates astonish me. California does not look like a high tax state to me. For example, my home province of Ontario is:

5.05% on the first $39,723 of taxable income, +
9.15% on the next $39,725, +
11.16% on the next $429,552, +
13.16 % on the amount over $509,000

which looks high until you look at Nova Scotia:
8.79% on the first $29,590 of taxable income, +
14.95% on the next $29,590, +
16.67% on the next $33,820, +
17.5% on the next $57,000, +
21% on the amount over $150,000

or Quebec (my former home province):
$41,095 or less 16%
More than $41,095 but not more than $82,190 20%
More than $82,190 But not more than $100,000 24%
More than $100,000 25.75%

and that is after federal taxes:

5% on the first $43,561 of taxable income, +
22% on the next $43,562 of taxable income+
26% on the next $47,931 of taxable income +
29% of taxable income over $135,054.

One difference, we pay provincial tax based on province of residence, so when I moved to Ontario and still worked in Quebec, my taxes went down.

Those low tax rates should leave all you U.S. taxpayers lots of money to buy health insurance, which is what a huge part of our high taxes is going to. And a big chunk of the rest is education, which is why my daughter is paying about $6,000/year for a good university.

It also explains why RRSPs are so popular, they do a nice job of reducing that net income. Of course it is tax deferred, and you have to start cashing in at 71 at the latest, so the government does still get its pound of flesh.

Sorry for the length, but it is always informative to see what others are paying.

‘…top tax rate of 9,3%’. Wow, I had to read that three times and stil can’t wrap my head around it. Right now I live in the Netherlands where the lowest possible taxe rate (national, not state) is 33%. Yes, is says 33%… And to my own astonishment, most people here are doing (more than) fine. State pensions used to be relatively high though (dropping now), and a college education isn’t nearly as expensive as it is stateside. Health-care isn’t too bad either (though it seems to vary greatly according to individual circumstances). Just goes to show that sound financial decisions may differ greatly from country to country. Having said that, I do believe that being frugal and spending way less than one’s income is ALWAYS an amazingly good idea!

Property tax for our small, semi-detached house worth about 165.000 euro = 1300 euro per year to the council. We also pay extra for it trough income-tax (house value is one of the many factors that determine one’s income taxes (national level). Another biggie is the contribution to waste disposal&sewer system, at 400 euro per year (we live in Groningen, which is rather an expensive municipality to live in. On the bright side: houses here come relatively cheap, and we can cycle just about everywhere). I’ve always considered it a huge waste of money to get a big house. It’s obviously way more frugal to declutter, be a minimalist (sort of, anyway;), and make do with less space.

Wow, what a broad range of rates, thanks for the insight Retired! Ontario looks surprisingly cheap considering that includes health insurance, but Quebec is obviously much more expensive.

Out of curiosity, do you guys also have a social security type program? That and medicare take another 7.65% of income (not tiered, off the top), 15.3% if you’re self employed, since the employer is required to contribute the same for those programs.

Canada Pension Plan is funded via contributions of employees and employers and is managed separately from other government programs. This means that CPP payments are separate deduction on your paycheque. Even before the latest changes, every economist & auditor has confirmed that it is being sustainably funded for the future. This is intended as a basic pension for everyone who earned income throughout their career, and as such there’s a maximum contribution income of $42,100, meaning that if you earn more than that, you don’t pay any more into it nor are you eligible for more than the maximum. The maximum pension a person is entitled to varies on what age they start to draw it (a person is “penalized” for drawing it early – minimum age is 60, and penalties go away at 67). More reading here: http://www.servicecanada.gc.ca/eng/isp/cpp/contribrates.shtmlhttp://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml

We also have Old Age Security and Guaranteed Income Supplement programs. These are intended to augment the incomes of seniors with low incomes to a level that allows them a basic standard of living. Unfortunately, these are funded from general revenues and their sustainability is questionable – retiring baby boomers will put a huge strain on these programs.

I really love you website! I think it is great to show people that the things that make them happy in life doesn’t cost money. It’s usually just to boost their ego.

I do have one bone to pick. And that is inflation. I love the fact of saving and earning a return on my money. And I love the idea of compound interest. But what discourages me is the negative effect that inflation has on your investments and the unknown of what inflation will be in the future. If you go to http://www.shadowstats.com, you will see that a former government employee calculates inflation based on previous government models and models of his own.

So my discouragement comes for the fact that yes…you may have a return of 8% in one year. But inflation may in reality be 8% as well. Therefore, in nominal terms your money grew. But in real purchasing power terms it stayed the same.

This is why I generally quote investment returns on a “real” (aka after-inflation) basis as I did in this article. Using that method, you can safely ignore inflation in your equations, which makes them simpler.

You bring up another good point, which is worth another article (just added it to my drafts folder because of you!). There is a certain sub-culture of people, often orthodox followers of Austrian Economics, who assert that the US government systematically underestimates inflation in the official figures.

I’ve read as many of these dissertations as I could find (including the one in Crash Proof), and I wholeheartedly disagree with them. I feel that the cost of necessities is rising more slowly than the official CPI (or in some cases, falling) for the thoughtful and aware person. Many categories of food are drastically cheaper now than they were when I was a kid in the 1970s and 80s, as is knowledge, entertainment, computers, bikes, appliances, cars on a cost-per-mile basis, heating/cooling/lighting a house on an energy-cost-per-square-foot basis, and many other categories.

In 1975, how many people drove around in 265 horsepower 7-passenger minivans that could accelerate to 60MPH in under 9 seconds (faster than a 1975 corvette) with air conditioning, satellite navigation, multiple HD movie screens, and a 200,000 mile lifespan? Nowadays you can buy one of those things used on Craigslist for about $8,000.

This ongoing drop in costs is made possible by our large increases in productivity – most of it due to technology.

The key to getting the benefit of this deflation is not inflating your own lifestyle as quickly as your friends in consumer society inflate theirs.

From my mild examination of the US government’s calculation of CPI, it has been adjusted over time to account for lifestyle changes. It is a bag of goods that the average US consumer CURRENTLY purchases. (ex: in 1960 hardly anyone owned a dishwasher, but now that everyone does it is much more heavily weighted in the CPI calculation; same with cell phones and all luxury purchases)

MMM, do you know if inflation is directly based on the CPI? If so, inflation is not only a measure of increasing prices but also of increasing luxury purchases. Before I understood this relationship, I thought that inflation was directly related to the value of my dollar, but in reality it is related to the value of the average consumer’s dollar against what the average consumer buys. If you practice mustacianism and buy a lot less, isn’t the value of your dollar more? This should allow all of us practicing the ideas in this blog to outwit inflation to some extent.

Food inflation has been 500% since 1980. The official inflation rate is only 310%, because it conveniently does not include food cost increases. That’s why many economists from many schools (not just austrian) think the official inflation rate quoted by the politicians is too low.

Anecdotally, this checks out too: I remember my parents paying about $4.00 for a 4L bag of milk throughout my childhood in Canada (roughly one gallon). You can still get milk for not much more than that at discount grocers in Canada.

Meanwhile, here in the US it is even cheaper: $2.50 – $3.00 per gallon for standard milk, and $5.50 for the organic stuff I’ve been buying in recent years.

Of course, milk is only one category, but it is a nice proxy for food in general as it takes a lot of energy, water, and land to maintain cattle. Cheap crops like potatoes, rice, and good types of oil are even more shockingly cheap on a per-calorie basis. For practical purposes, basic food is virtually free these days.

As for fuel: you can take 5 people 40 miles on the highway with one gallon of gas, currently listed at $3.75 down the street from me. And I can keep my 2600 square foot house warm and take hot showers year-round here in Colorado for just a few hundred dollars a year of natural gas. My electric bill is in the $20-dollar range per month.

Food is a relatively small part of my budget and substitution is readily available, and I cook great food and eat well. BY FAR my biggest expense (health insurance), has increased a compounded 9% per year for at least the last decade, not to mention my other largest expenses: utilities (and I’m wayyy under your electricity/water/trash consumption…), property taxes, property insurance…. Building supplies? 2x4s: +20% in the last 2 years. Insulation: +30% in the last 2 years. Anyone who thinks inflation increases at only 3% per year (or that the fraud that is the CPI -‘umm, don’t like it? manipulate it’~the politicians who would have to deal with a real COLA), is sadly mistaken. No way. (Incidentally, I’m a very optimistic, positive, and happy person; but denying reality doesn’t alter my level of optimism or happiness.)

More: OUR LARGEST EXPENSES, including:
House: 30 years ago (and this is a NEW house): US median 32.5k. At 3%, that would be 79k today. I’ll let you tell your readers what the current median new house goes for, after the biggest real estate crash on record.

kyleJune 13, 2013, 4:01 pm

To your house comment below: median house size in 1980 was 1595 square feet. In 2010 it was 2169. Of course the median price will go up when the house grows by 30%.

Wha? 30 years ago was 1983. The 1983 (summer) median new home price, per US Census data, ~$76,000. At 3%/year that’s $184k now, which is really, really close to the actual current median new home price on a per square foot basis (as Kyle noted).

I scan receipts and have every single grocery bill since 1998 accessible. People keep telling me how much everything got more expensive especially with the introduction of the Euro here. However, if I ask them how much they paid for something ten years ago, they have no clue and guess. Those guesses are really far off the actual prices that I can show them on my old receipts.

‘I scan every singel receipt’. Cool, and good for you! We’ve got the feeling that one of the things that really did become more expensive with the introduction of the euro is having a drink/meal at a restaurant/coffee shop etc. Did you keep track of those receipts as well Christof? Are we right in thinking this is actually quite a bit more expensive than it used to be pre-euro?

It really depends on the restaurant… To keep things comparable I’ve digged out one restaurant bill from Dec 2000 of a restaurant chain that’s more on the low cost side (http://www.schweinske.info). The old bill was 16.82 Euros (converted from DM). The same food today is 21.45 Euros adjusted to the same VAT rate we had back then (16% instead of 19%).

So this particular restaurant has increased prices by 27% over the past 13 years, or less than 2% each year.

ChristofJune 12, 2013, 9:31 am

Here’s another one (http://www.cadoro.de): In june 1997 Insalata Mista was 3.47€ (converted and VAT adjusted), 16 years later it’s 4.90€. A pizza back them was 7.72 Euros, today it’s 6.90 to 10.50.

Mr. Frugal ToqueJune 10, 2013, 1:51 pm

You have to be really careful about how you look at those numbers. They’re usually based on a “basket of goods” type calculation.
If people used to buy raw foods and cook them, but today they buy processed foods, then you’ll see that inflation is high.
But if you eat like your grandparents did – in fact, even if you eat way, way better than your grandparents did – but still cooked your own food from raw ingredients, you’d be able to live even more cheaply than the inflation numbers suggest.
The same goes for fuel costs.
Sure, the cost of gasoline is rising, but the cost of going somewhere by car is way, way cheaper because cars are fantastically more efficient (unless you’re Clown Driving your SUV around town).

Bob, the calculation for CPI done by the BLS does take into account food. That is why many economists from many schools think the official inflation rate quoted by politicians is accurate. Please take a look at this link to determine for yourself rather than just my opinion.

First, food inflation has not increase 500% since 1980. The US CPI-U index for food and beverages was 86.7 at the end of 1980 and 233.670 at the end of 2012. A difference of 146.97, which is 169.52% of the 1980 value, not 500%.

Second, you seem to think that “official inflation” does not account for for food increases. The CPI all items index for the US City Average is the “official” inflation measure, and it’s just that – it includes ALL ITEMS in the CPI item structure. The usual one quoted is for CPI-U (Urban), which is the one most widely used for things such as adjusting tax brackets and such. The CPI-W (Wage Earners) is used to adjust Social Security payments.

The CPI also produces a “Core” CPI – which excludes volatile items such as food and energy. This is NOT used to adjust payments or other government uses of the CPI. The purpose of the “core” CPI is to measure the general price trend in the economy since food and energy are known to be volatile. Again, it is NOT used for any official purposes, nor is it the “official” main CPI.

Finally, I’m not sure what “austrian” school or what school of economics you’re referring to that thinks the US CPI understates the rate of inflation. To the contrary, MOST economists versed in price statistics think it OVERstates the rate of inflation. There was a commission tasked in the 1990s with addressing this issue (see Boskin Commission). The reason for the assumed overstating of inflation is that the market basket of goods (the relative weights of the items within the index – how much of the pie is housing, how much of it is food, how much of it is gas, etc.) are essentially static whereas the prices collected change monthly.

The CPI’s solution for this was to produce another index, which was in the news this past spring: the Chained CPI (C-CPI-U where U stands for Urban – they don’t do a chained for Wage Earners). In the Chained CPI-U, the weights change every month, so the final number accounts for how people change their spending on what they buy every month as opposed to just measuring the price changes themselves. The downside to this index is that it takes much longer to produce – they put out a preliminary one when the regular CPI is released each month, and then they put out the final Chained CPI numbers about two years later.

Mike, I agree, the difference in prices between stores in high-income neighborhoods and low(er)-income neighborhoods is really staggering. I recently discovered the Asian grocery stores here in San Diego. SO MUCH CHEAPER

This very issue has played out in New Zealand’s most recent CPI numbers. Whilst it’s true that there has been some calcalated inflation it does not mean that individuals will have experienced this inflation, it’s highly lifestyle dependent. To quote Statistics New Zealand:

“In the March 2013 quarter compared with the December 2012 quarter:
The consumers price index (CPI) rose 0.4 percent.
The main upward contribution came from the alcoholic beverages and tobacco group (up 4.4 percent), reflecting an increase in the excise duty for cigarettes and tobacco.”

When I reached FI back around ’89, I really understood very few of the principles you discuss here, or those I discuss on my own blog for that matter.

This one might have been the biggest (pleasant to be sure) surprise. I’m still a bit amazed at the acceleration that begins to occur.

Between then and my last “retirement” two years ago I took several mini-retiremnets ranging from 3 months to five years. Every year, my net worth grew. Working or not.

Sometimes it’s very hard to see when you are just starting. You have maybe 10k and you earn 10% and you have $1000 and that certainly doesn’t buy you retirement. But then one day you have 500k and 10% of that is $50,000 and suddenly things are exploding.

On my most recent post, I had a woman comment with the objection that my rosy projections of begin able to retire after about ten years were bogus. She’d been saving diligently for a bit longer and “only” had 430k. I’m sure it was tough getting there. But what she has yet to see is just how powerfully that’s going to expand now for her.

Thanks MMM for motivating me to get off my behind and biking 3 miles to and from work each day. Though my colleagues in my affluent suburb IN THE SOUTH think I am nuts, I would have never done this had I not read this website. I am practically your age, 37, and STILL working. The good news is I have always been frugal and we have amassed a nice silly little fortune and are working on early retirement. I have a unique problem where we put too much into our IRA’s and 401k’s and not enough into taxable accounts. Oh well, you live and you learn. Thanks again.

Thanks for linking to that post about the 401k. I’ve been wondering if I should change my contributions. So, I took at look at what I have in there.

I figured if I change nothing else and erase my mortgage payment and car payment, I can easily get by on 30k a year. (This is still paying for cable, gym membership, and other luxuries!)

So, I plug numbers in the cruddy calculator that my employer provides, specifying age 60 for retiring:
If the market performs average: 41500/yr
If the market performs poorly: 28500/yr

Now, I like my job, so if were to stick around to age 55 (another 18 years) I’d be getting a ~19k a year pension (future dollars). Plug that in:

If the market performs average: 57800/yr
If the market performs poorly: 44800/yr

I guess I *could* be done putting money in the 401k if I wanted to! But there is this part of me that doesn’t want to pass up the company match. They match 100% of the first two percent, 50% of the next two percent, and then 25% of the next four percent.

Thanks. I’ve just looked up the plan details, and they’ve actually changed it so I only have to put in 4% now instead of 8, which is great. I’ll put in enough to get the maximum match, and still have about $400 more a month to throw at my debt!

I had to get my calculator out on that one! We are matched 50% of 4% of salary. I consider that few thousand as part of my “income” paid to me for my hard work. I was very briefly laid off which allowed me to cash out my 16 yrs of 401K and put it into something more lucrative. I blinked and had a better job at my company, but was so glad to have had 2 months off! I will say, I did miss the company match exploding my earnings even more–for me it was noticeable. I think if you’re enjoying it and it makes you feel good then stay with it. There will come a time when the balance will tip (I’m getting there) and the free money won’t feel as wonderful, for your own personal reasons. That’s when you’ll walk away for your fun part-time job or no job at all!

Our plan is to ride “the money wave” for a while after reaching FI. The plan is to transition into FI by doing part-time work to cover basic expenses. Part-time work could be a small/micro business, or consulting, or working for others, or whatever we like really.

This plan gives us some transition time to figure out financial independence and also build some safety margin into our investments which we could potentially use for travel abroad.

5% after inflation is oh, 7-8% return? Where can you get that now without taking a fair amount of risk? I’m 25 years older an did what you did (being a big fan of YMOYL)and after the crash in 2001 and again in 2008 I’m still where I was in 2000 having continued to work for myself since then. Fortunately, that is just the money I saved and is enough for retirement – the earnings over that time period are less than 4%. And it was mostly Vanguard funds as you suggest. I figure it has to last 30 more years. At some point, there is diminishing ability to make up for a shortfall by returning to work. I’m not saying the strategy won’t work – I think all of of it is fantastic advice – for someone younger.

Hi Bonnie – I’m a bit surprised to hear that. Stocks have been paying at least 2% dividends since 2000 (and up to 4% in 2008). Reinvesting those during that time should have resulted in at least a 30% nominal gain in the total value of a lump sum (or am I missing something?).. And if you’ve continued to make regular investments, you should be way ahead – as long as you are not just looking at the actual level of the S&P500 index and ignoring dividends.

I agree though – any comparison that happens to start at the year 2000, when stocks were at their highest P/E ratio in history and almost TWICE as expensive as they are today (http://www.multpl.com/shiller-pe/), is bound to look bad for decades to come.

It’s like saying, “I bought a $600,000 house in inland Florida in 2006, and I’m STILL down almost 50% after seven years. Why does Mr. Money Mustache tell me that housing can be a good investment?”

Well, after the 2001 drop it took until 2008 to get back to the same amount of money in 2008. I continued to reinvest dividends and contribute to the funds. Then, 2008 bombed and I freaked and went mostly to cash waiting for the *second* dip. My bad. I lost out on the run-up since then. I’m slightly ahead of my cost basis of all my investments. I guess my point is that the lesson from a longer term investor than yourself is that its easy to make decisions (or worse, not act) that have a big impact on your stash and when youth begins to fade those decisions become more costly. I hope to be around 20 years from now and see how you’re doing!

Aha.. NEVER sell in an attempt to outsmart a down market. Never never. Never times 1000. If you must sell something, sell your house so you can buy more stocks at low prices! ;-)

With stocks in index funds, there is rarely a penalty for “not acting”. Buy and hold is the statistical best bet for over 99% of skill levels out there (and I lump myself firmly in that bottom 99% as well). The only penalty comes when attempting to sell and re-buy.

A book that isn’t on your reading list (but is an ancestor / partner book for ‘The Intelligent Asset Allocator’, which is) is The Intelligent Investor, which was originally written in 1949, by Warren Buffet’s mentor, Benjamin Graham. It has regular updates but always includes the original chapters. A slightly difficult read, but worth the time investment ;)

It highlights how actively managed fund manager’s are almost forced to buy high and sell low, and that the average amateur investor can be drawn in to the same game.

When you partner it with ‘The Intelligent Asset Allocator’, it provides the user manual for buying shares in good companies when they are on sale (selling your house to do so is definitely Intelligent!), and for distributing your investments amongst passive index linked funds but rebalancing those investments to sell high, and buy low.

As long as you have the badass cajones to hold those shares when others around you are panicking and driving share prices down during a crash.

EDIT : Bugger, it is there, just not in your read section, apologies! But read it soon, it’s worth it!

I’m so glad you keep mentioning the POINT of all this, which so many financial writers forget: a truly rich life. There is nothing more precious and finite than TIME and gaining financial freedom is only way to get more of it.

I’m a big fan of this blog and have incorporated many money savings tips already. My problem is we simply don’t make enough money to save anywhere close to 50%. A household income of $75k would be a dream. I’m doing everything I can think of, but I think we just need to find a way to earn more, or get a night job.

Love the post, Mr. Money Mustache, especially the three points. I think #1 is slightly tricky because most people don’t even realize what they actually spend today so their estimate of what it will take to live in retirement is often way off base.

As I’m sure you’ve mentioned in a post somewhere (I’m new here), it would be really smart to A) know what you spend today, B) figure out what you think you’ll need in retirement and then (most important) C) try to live on what you think you’ll need in retirement to give it a test run.

Hi MMM! I’ve been reading for a year of so now and I really enjoy your blog. I’m trying hard to work many of your strategies into my life.

Tax evasion by the wealthy is a big deal right now in the news in North America. Do you search for loopholes or otherwise evade taxes? You don’t seem the type, but I was wondering where you stand on the issue of the wealthy evading the tax man… since you are arguably one of the wealthy at this point.

Personally, I don’t begrudge paying taxes. I was also wondering if you avoid tax by simply spending less and living off your passive income (since you don’t get taxed on your savings, but just the interest vs. someone who makes 100s of 1000s each year and spends most of it.

Oh, don’t get start talking about taxes in this country – you’ll get angry people coming out of the woodwork! :-)

I personally enjoy paying the nice, moderate taxes we have in the US. I figure that it is a form of investment in society. Far from being perfectly efficient, but not all that bad when you run the numbers (for example, what is the value to society of all the land the national forest system preserves for us? And are you glad that the EPA enforced that ban on lead in gasoline, considerably improving the health of hundreds of millions of people?).

I also figure that since I will only be living off of a small fraction of the money I earn through life and giving the rest away, what do I care if a certain portion goes to my own society through its government, versus through privately run charitable operations?

It won’t affect my own standard of living anyway, as I’ll have more than enough left over for house, food, beer, and bikes either way. I think feeling like you have enough and then some also helps take much of the negativity away from the issue of taxes.

To my knowledge, no one has done a detailed Fama/French-style study on living on investment income for periods longer than 30 years. FIREcalc sort of does this. But then there’s the problem of having enough useful sample periods for (example) a 50-year period. Let’s say someone with good genetics and a health-centric MMM-style life (eat healthy, exercise, low/no stress) retires at age 40. Living another 40 years is practically a given, 50+ years is not unlikely.

A few other comments have said this, but: you really bank on 5% real returns for the next 40 or more years? I’ve seen this debated endlessly on the forums, so in the end, you just have to choose a rate of return that makes you comfortable.

But, at least a couple noteworthy people have suggested lower returns might be the norm going forward: Wade Pfau and William Bernstein. The former mentioned on a blog post not too long ago that he assumes 2% real returns for his retirement portfolio. In “The Intelligent Asset Allocator”, Bernstein remarked that the last century of returns in the USA are probably outsized, and one ought to adjust expectations downward going forward (I forget the exact numbers he used, but I want to say something like 3% real). These are folks who I don’t believe are trying to sell advertising with doom & gloom headlines.

With two young kids (a toddler and a newborn), I have effectively four times as much life uncertainty for the next 20ish years (two kids, wife, me). So I personally bank on 2% real returns. MMM’s ideas still hold up in this case; everything just takes substantially longer. Below 2% and I think the idea that a moderate saver (say less than 30%) can retire early starts to fall apart. In fact, last time I checked, using 2% real returns, you need to save 10%–15% just to retire at the “classic” age of 65.q

In a low-investment-return environment, perhaps the biggest returns come from frugality and learning to be happy on less.

I’m curious: is there anyone out there with young children living exclusively on investment income? I.e. no side-job allowed (MMM doesn’t even count, because he still works, even if it is a hobby-job). If so, what percent of your investment portfolio are you spending? Are you using the 4% rule? Or something more (less?!) conservative?

If someone were planning to retire TODAY on an all-stock portfolio with no plans to work ever again and no flexibility in spending, I’d caution them to lean closer to 3-3.5%.

But since this is an Early retirement blog, I assume many people will indeed earn money in retirement. And in fact, heir spending may even go down over time rather than rising with inflation, as their frugality muscles continue to pump up.

It’s hard to model Mustachianism into a statistical study, because the very definition of the lifestyle is being adaptable to new circumstances.

If someone is truly fixated on whether 3% or 4% is the correct Safe Withdrawal Rate, it is likely that they would get higher returns by learning more about adaptability instead of historical stock patterns.

Back to the 5% real returns during the accumulation phase (i.e. before FIRE)…

I re-created your numbers in my own spreadsheet, but parameterized some of the variables: the real rate of return, and the annual savings amount. The assumption I make is that your annual savings amount is exactly the amount you need in retirement. And I mean savings amount from wages (not including passive investment portfolio returns). In other words, using your numbers, the person is saving $37.5k/year from his wages, and needs that same amount annually after FIRE.

I looked at how many years until the portfolio generates the needed amount for the following real rates of return: 2%, 3%, 4%, 5%, 6%, and the following target amounts: $20k, $37.5k, $100k. (The target amount was more of a sanity check—as expected the number of years of required savings doesn’t change more than a year [meaning the “real” year is probably fractional]). Here are the results:

6% returns: 13 years
5% returns: 15 or 16 years (your example)
4% returns: 19 or 20 years
3% returns: 25 or 26 years
2% returns: 37 or 38 years

Let’s assume that the future returns behave similarly to past returns. For a heavily equity-weighted portfolio, the returns will be increasingly volatile over decreasing sample periods. A “lost decade” could easily waylay your early retirement plans. Luck does play some part here.

I’m not trying discourage saving or having FIRE as a goal; not by any means. If you have a pessimistic bias like I do, the conclusion is that you have to save aggressively *just to retire at the traditional age*. It’s easy to find scary stats that most American’s are not doing this.

It’s also not hopeless; you can improve the timeline by further improving your saving/spending ratio. Let’s say you save twice what you need (66% savings rate): even with my dismal 2% returns, it drops your working years down to 22—it knocks off more than a decade. Using your table, with 5% returns, it drops the working years down to 9!

So I’d like to thing my thesis here is really about bringing the MMM philosophy full-circle: it all comes down to optimization. Improve your saving/spending ratio by earning more, side hustle(s), ever-increasing frugality and spending flexibility. Those things are under your control. If you do all that AND get lucky with good returns, your problem will be having too much money. A nice problem to have. :)

Did you also know that, historically, real inflation-adjusted stock returns have averaged about equal to the inverse of the Shiller-PE, once you take out the effect caused by changes in the PE over time? (For some decades it’s been a bit higher and sometimes lower, but that’s a pretty good average.) That is, if you expect in the long run the Shiller-PE will not change too much from today’s value of 24, you would only expect long term equity returns to be about 1/24th, or 4.17%. That’s significantly below 5%. In addition there is the risk that the Shiller-PE might fall closer to the historically average levels, making real returns even lower. And that’s for an all-equity portfolio, which is more risky than many will want to own!

True and nicely put, Ed.. but as I tried to point out in my earlier comment, a return forecast like that is based on a single lump-sum investment made at today’s index level (or someone ceasing all contributions and retiring today on an all-stock portfolio).

I fully expect P/E ratios to average back down over the various bear markets and crashes of the future. Which means that investors who buy shares at those lower levels can expect higher returns from the portion of the shares that they bought when they were on sale.

Even buying all-in at today’s level and getting 4.17% would not be the end of the world. But I imagine we’ll have a chance to do better than that with a series of investments over time.

Interesting way to put it. When you look at it this way, the year that you have enough passive income to live off of but you choose not to spend it, you can effectively have a savings rate over 100% because you are able to increase your investments by more than your working income. If you let this go on for a while it could be a very powerful force.

I see where you say principal paydown is an increase in net worth for your mortgage payment. But assuming your house is paid off, is it’s value included in the “amount” column in the table in the article? Or do you not include your home as an passive income generator?

I am amazed at how many think once you Early Retire you will never have the opportunity to make earned income ever again (I know it starts with the assumption that you’ll be losing earning power after you leave the workforce, but its really taken as an absolute from what I’ve seen)

No one will ever retire with an honest “I wouldn’t have enough to do X” mentality because, face it, X may not become a desire until after you retire, and who knows what X costs….

Two things extreme early retirees have are the health the work in case they what a little more income to do X, and the abundance of time to make that extra work at whatever pace is desired so as not to be a pain in the ass.

I really don’t even understand the people who work for another decade to “be certain” they’ll never run out of the money they “need”. Why not instead “be somewhat confident” and leave and see how it goes. Why not retire at 30, discover maybe around 40 that you should increase the assets with some earned income, and go get more then (thats ten years of raising your children, broadening your horizons, even maybe discovering what you really want to ‘be’ when you grow up…)? That way you’ll only have to return if you have to return, you’re not just listening to Suzie Orman say you’ll never make it without working till your 70.

Is it weird that I have no idea how much I think I’ll need for retirement? How does one go about figuring that out? I am hoping I won’t have a mortgage anymore.
Because I was (am now married) a single mother from an early age and I have substantial student loans, I don’t actually know what it actually looks like to live my life not being chained to my debt. We will be in a very different financial place in four years when my student loans are paid off, car loans, and consumer debt is gone.
Do you have any tips on how to figure something like this out?
Cheers
Lindsey

Good article again MMM showing how saving a good chunk will let you do what you want with your life in a relatively quick amount of time. I think when people bash you about your extreme early retirement they are mainly jealous, but also forget that even if by some insane devil magic causing your financial situation to change and you aren’t making enough money…you can always go back to work. it’s not like when you early retire you instantly become incapable of doing any sort of work, if need be you can always go pick up another job and re-evaluate retirement.

It’s especially hard to get other’s on board, when your savings rate hovers between 50% to 75%, and their’s is between -10% and 15% and your friends want to always spend to bring your savings rate down every time you meet up with them. You gradually try to get them to feel happy without spending money, by using your creativity and discipline to entertain and create tools for your needs/wants; though, this only gets tougher with any new significant other. Yet, they are more willing to open their mind to the concepts and begin to practice them by your lead until they are gradually on board to FI.

Sometimes, like electricity, it’s easier to explain it by saying “it’s Magic”, and amaze the children, until the children get more individually curious and ask more and more questions. Then your grin grows wider as some discover, while other’s still believe they can’t ever “perform magic”!

Like sending a biodome capsule of tree saplings to Mars, 99% will think it’s stupid and will never work or can’t be done for reasons X. Then you prove them wrong and terraform an entire now livable Planet by “Magic”.
Then charge them royalties against their blockading negativity or leave them all on one planet to negate themselves into Oblivion.
This is why some very wealthy individuals get away from America/Europe/China and create their own countries.

Your new take on the concept of compound interest is refreshing indeed! It boggles my mind to realize it is possible get around-the-world plane trips – something most people have to work months if not years to save for – basically for free!

I guess the key to get there for most of us is to be willing to delay our gratifications. Some people can do it (and save the money). Others may not be so willing (and end up retiring later as a result). There isn’t a right or wrong answer.

I’m willing to save now so I can retire early. But I’ve come to understand that while everyone CLAIM they want to retire early, not everyone is willing to work for it. It’s a personal choice.

Like you’ve said, people can certainly have it all. They have just to think and plan ahead, instead of going with the masses and then wondering what happened after the fact.

For Europeans, what’s the problem about investing in S&P500? You can own Vanguard S&P 500 ETF traded in the NYSE Arca, it’s exactly the same as index funds. For being non-US resident 15% will be directly taxed on dividends and go directly to US Tax-Authorities, however anyone living in a EU country can claim it back when filling the tax-form. If you prefer more simple solutions, just go for db-x trackers ETFs instead, this kind of fund capitalize dividends so you only have to worry about capital-gains taxes.
Europeans worried about the currency risk can also own the SP500 EUR/GBP/CHF hedged ETFs from Amundi or db-x trackers, this means flotations on currency exchange won’t affect the value of the assets. I think diversification is the key, so owning funds that track MSCI Pacific, MSCI Europe, SP500 and MSCI Emerging Markets is the way to go in order to be diversified in all economies and currencies. I would overweight Euro exposition by owning a fund on Euro countries, even if, theory tell us that currency adds zero value and small risk to investments in the long run, Vanguard published some papers about that.

Reinvesting dividends does not make them tax free everywhere in Europe. In Germany we pay 27.9% on dividends. If a fund reinvest dividends, they still have to pay tax to the Authorities first. If the fund doesn’t, because it’s international, then a tax filing for this fund is required on the yearly tax statement.

I own reinvesting dividends ETFs, mainly issued by Deutsche Bank. How can I know how much dividends were reinvested in the fund instead of distributed? Even if I wanted to declare these dividends I wouldn’t know how much should be declared. Are you sure taxes are applied on reinvested dividends in ETFs with synthetic replication instead of physical replication?

You don’t do the easy stuff, don’t you? Tax is due for realized capital gains, even if they are reinvested. In case of a replicating fund that’s easy: The fund owns shares, receives dividends, consequently you owe taxes. With synthetic replication it depends on how replication was achieved. Swaps and futures are non-realized capital gains. Therefore you pay taxes when you sell you shares, not every year. That’s covered in KStG §8b Abs 1 and 2 (http://dejure.org/gesetze/KStG/8b.html)

Difficulties arise when the fund is using a combination of holding shares and futures, because then you have to figure out what the dividend part is.

I’m convinced that if dividends aren’t distributed then it won’t be considered as income, consequently, shouldn’t be taxed. If it was supposed to declare those dividends then the fund would report how much dividends were distributed. I will contact Deutsche Bank directly to ear from them.

I received the answer from db-x, even for synthetic ETFs dividends must be declared. In my particular situation I’m exempt from filling tax-form for 2 more years (total of 5y), but I’m already trying to figure out the most tax-efficient funds once this benefit ends.

Math really clears things up, doesn’t it? And it doesn’t ever leave room for excuses. The barriers to entry to Financial Independence are usually self-imposed, and can easily be exploded by making better choices. It really is that simple.

The place where we’re at, I have chosen a house/location/job that doesn’t allow us a 50% savings rate, but I am definitely more motivated than ever to get there. The house burden was self-imposed, and I could easily drop it and rent for cheap to save closer to 50%. But at this point in our journey, it’s not the choice we want to make. No complainypants here, I totally understand my reality :)

Another very important point to remember from the graph is that it is the passive income column that matters, not the total wealth. I don’t do stocks, only corporate bonds. Sometimes, with corporate bonds, the actual value of the bonds could have declined but the income did not (and neither did the compounding). In fact, the actual price of the bond is not even relevant in comparison to the income that comes from it because, in the end, as long as one holds the bond to maturity, one will always receive the face value of the bond (plus all the accumulated interest income).

Changing subject: all around me I have worked with college graduates who don’t know what compound interest is. What are they teaching at these higher education institutes? And they actually paid for that lack of core knowledge (in more ways than one).

I thouhgt you might like this. Are you aware of the Scandinavian word “Lagom”? It roughly translates to sufficient, or just enough, but actually those words imply some sort of deprivation, where as lagom means in balance. It’s a concept of reaching the point where you have enough to be happy and any more would be surplus.

From Wikipedia: The Lexin Swedish-English dictionary defines lagom as “enough, sufficient, adequate, just right”. Lagom is also widely translated as “in moderation”, “in balance”, “perfect-simple”, and “suitable” (in matter of amounts). Whereas words like “sufficient” and “average” suggest some degree of abstinence, scarcity, or failure, lagom carries the connotation of appropriateness, although not necessarily perfection. The archetypical Swedish proverb “Lagom är bäst”, literally “The right amount is best”, is also translated as “Enough is as good as a feast”. That same proverb is translated as “There is virtue in moderation”.

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